(b)lines Ask the Experts – LLC Subsidiary Participation in 403(b)

“May the employees of the wholly owned LLC subsidiary of a 501(c)(3) corporation participate in the 501(c)(3) corporation’s 403(b) plan?”

Michael A. Webb, vice president, Cammack Retirement Group, answers:       

This is a good question, as individuals often confuse entities that may be required to be aggregated for testing and other purposes with organizations that may sponsor the same type of plan. To get to the answer to this question, let’s review the types of organizations/individuals that may sponsor a 403(b) plan under the Code. They are, as follows:

1)       501(c)(3) tax-exempt organizations,

2)       public education organizations (Internal Revenue Code Section 170(b)(1)(A)(ii)),

3)       ministers (defined by IRC Section 414(e)(5)(A)), and

4)       a state, including a political subdivision of a state, or any agency or instrumentality of a state for its public school employees (IRC Section 170(b)(1)(A)(ii)). (An Indian tribal government is treated as a state (IRC Section 7871(a)(6)(B)).

A Limited Liability Company, or LLC, is a private company that contains elements of both a partnership and a corporation. Though an LLC does not need to be organized as a for-profit entity, an LLC clearly does not fit into one of the four categories above of organizations that are eligible to sponsor a 403(b) plan. Thus, even though the entity in question is OWNED by a 501(c)(3), unless it is a 501(c)(3) itself, or is another type of organization listed above, it may not be able to participate in a 403(b) plan.

However, the IRS has issued a number Private Letter Rulings (PLRs), most recently PLR 201538020 and PLR 201539031, which appear to make an exception. A 501(c)(3) that owns the membership interest of a single-member LLC, where the single-member LLC has not elected to be recognized as a separate entity for federal tax purposes, can treat that entity a merely a branch or division of the 501(c)(3); the separate entity is disregarded for 403(b) eligibility purposes, and employees of the LLC may indeed participate in the 403(b) plan as if the LLC were a 501(c)(3) itself. However, PLRs only apply to the organizations who requested such a ruling, so you should consult with counsel well-versed in such matters before attempting to cover LLC employees in your 403(b) plan.

Having said that, even if it turns out that employees of an LLC are not eligible to participate in a 403(b) plan, the LLC and it’s 501(c)(3) owner may be considered to be a single employer for other purposes under the Code, such an for retirement plan nondiscrimination testing purposes.


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NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

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